Emerging market: Iraqis buy and sell using a whiteboard at the stock market in central Baghdad. AFP

ABU DHABI // Iraq is synonymous with “war-torn” and “risky”, but that is not stopping enterprising investors from heading to Baghdad to capitalise on the country’s quickening economic development.

The latest to enter the country is Northern Gulf Partners, a New York-based investment group that is launching a new hedge fund in the next three weeks, which will be followed by a private equity fund and other direct investments in the coming months.

The group is joining a handful of investment groups already operating in the country, described by one fund manager as still being two years away from being called an “emerging economy”.

The new fund, Iraq Investment Partners I, would start with a small initial investment but grow to between US$30 million (Dh110m) and $50m within a year, said Zaab Sethna, one of the principals. The current largest fund operating in Iraq is Godvig Capital’s Babylon Fund with $23m.

Mr Sethna has a long history in the country, serving as a political consultant to the Iraqi opposition and Ahmed Chalabi, as well as being the spokesman of the Iraqi National Congress. He said there were tangible differences in Iraq, which showed “the atmosphere is getting better”.

“In 2006 and 2007, things were not good,” Mr Sethna said. “Violence was high, Iraqi businessmen were leaving in droves; I was considering packing it up and leaving. But from last August on, coincidentally or not at the same time as the surge started, I started to detect things getting better.”

Another partner, the author and journalist Bartle Bull, covered the Iraq War for publications in the US and Europe. He is currently the editor of Middle East Monitor and the foreign editor of Prospect. A third partner is RP Eddy, a counter-terrorism expert at the conservative Manhattan Institute and chief executive of Ergo Advisors, a risk advisory firm.

The fund will focus on investments in companies traded on the Iraq Stock Exchange (ISX) and other firms operating in Iraq that are traded on the international markets. It will also invest in local bonds, debt investments and some bank deposits. The hedge fund – and eventually the private equity fund – will be managed by Northern Gulf Advisors, which is owned by Northern Gulf Partners.

“Our idea is that the ISX could very well grow by five or 10 times within five years,” said Will Corbett, vice president of Northern Gulf Partners. “In the next few years, things will be a lot more stable. Former state-owned enterprises are becoming privatised. The need for investment presents pretty incredible opportunities.”

Gross domestic product in Iraq is expected to grow between eight and 12 per cent in 2008, according to data from the International Monetary Fund. The inflation rate is stabilising, while the number of troops dying in combat is at a four-year low. And the Iraqi government yesterday started the international bidding process to develop eight oil fields and two gas fields, a move described as the beginning of foreign investment in the country’s petrochemical industry.

Still, Goldman Sachs last year ranked Iraq last out of 180 countries in terms of openness and corruption. Most international ¬investors would stay away from the country until businessmen can enter and leave safely, said Imad Ghandour, the head of research and strategy at Gulf Capital.

“From an investment point of view, I don’t think the situation is getting better,” he said. “The fact that oil companies are there isn’t that meaningful. They always take a higher risk than the rest of the corporate world.”

Another issue is the fledgling ISX. It still trades on a whiteboard system, where bids and asking prices are tracked with blue and red pens. It also has low liquidity. The exchange has a market capitalisation of about $2bn, which is one-fifteenth the size of Jordan’s exchange, a country with a smaller population and few oil reserves. Trading on the ISX takes place three days a week for two hours a session, which adds up to about $40m in trade volume a month.

“Admittedly, it is very small,” said Bjorn Englund, the manager of the Babylon Fund and chief executive of Godvig Capital. “That is why we are happy to see new people set up. We need competitors so we can have liquidity.”

Mr Englund said volumes would likely rise by 100 per cent for the year. Trading grew by 250 per cent from 2006 to 2007. An electronic system created by Nasdaq is also expected to launch in the coming months.

“I have quite an optimistic view of Iraq,” Mr Englund said. “The macro data has improved quite a lot. On the political economic scorecard, we see good numbers all over.”